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14 December, 12:57

Disposal of Plant Asset

Ben Company has a used executive charter plane that originally cost L04 $1,000,000. Straight-line depreciation on the plane has been recorded for six years, with a $100,000 expected salvage value at the end of its estimated eight-year useful life. The last depreciation entry was made at the end of the sixth year. Eight months into the seventh year, Ben disposes of the plane.

Required:

Prepare journal entries to record:

a. Depreciation expense to the date of disposal.

b. Sale of the plane for cash at its book value.

c. Sale of the plane for $300,000 cash.

d. Sale of the plane for $220,000 cash.

e. Destruction of the plane in a fire. Ben expects a $210,000 insurance settlement.

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Answers (1)
  1. 14 December, 12:59
    0
    Answer and Explanation:

    The Journal entry is shown below:-

    a. Depreciation expense - Airplane Dr, $75,000

    To Accumulated depreciation - Airplane $75,000

    (Being depreciation expense for 8 months is recorded)

    b. Cash Dr, $250,000

    Accumulated depreciation - Airplane Dr, $750,000

    To Airplane $1,000,000

    (Being the sale of airplane is recorded)

    c. Cash Dr, $300,000

    Accumulated depreciation - Airplane $750,000

    To Airplane $1,000,000

    To Gain on sale of airplane $50,000

    (Being the sale of airplane is recorded)

    d. Cash Dr, $220000

    Loss on sale of airplane Dr, $30,000

    Accumulated depreciation - Airplane Dr, $750,000

    To Airplane $1,000,000

    (Being the sale of airplane is recorded)

    e. Insurance settlement Dr, $210,000

    Loss of insurance settlement Dr, $40,000

    Accumulated depreciation - Airplane $750,000

    To Airplane $1,000,000

    (Being insurance claim on airplane destroyed by fire is recorded)

    Working Note:-

    Under Straight-line method:

    Depreciation per annum = (Cost of asset - Salvage value) : Useful life

    = ($1,000,000 - $100,000) : 8 years

    = $112,500

    So, the Ben company will depreciate the airplane for 8 years by $112,500 every year.

    Accumulated depreciation for six years = $112,500 * 6 years

    = $675,000

    a. Depreciation expense for 8 months = $112,500 * (8 : 12)

    = $75,000

    b. Accumulated depreciation up to the date of disposal = Accumulated depreciation + Depreciation expense

    = $675,000 + $75,000

    = $750,000

    Hence,

    The Book value at the date of disposal = $1,000,000 - $750,000

    = $250,000

    c. Gain on sale of airplane = (Accumulated depreciation + Cash) - Cost of asset

    = ($750,000 + $300,000) - $1,000,000

    = $50,000

    d. Loss on sale of airplane = Cost of asset - (Accumulated depreciation + Cash)

    = $1,000,000 - ($750,000 + $220,000)

    = $30,000

    e. Loss of insurance settlement = Cost of asset - (Accumulated depreciation + Insurance settlement)

    = $1,000,000 - ($750,000 + $210,000)

    = $40,000
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